“Despite a better-than-expected first quarter FY21 results, Ind-Ra believes that cement demand could contract 10%-15% yoy in FY21,” said a research report by India Ratings and Research on Thursday.
Cement companies across the country took price hikes in April and May 2020 as supply was disrupted and demand recovered quickly. Southern region witnessed the steepest hikes, followed by the western region. Despite the faster demand growth, eastern markets witness a subdued pricing environment due to supply additions, leading to an oversupply.
“We believe that the combined impact of monsoon/floods and lockdowns in states can aggravate the weakness in prices in the seasonally weak Q2 of FY21 after which the recovery will depend on the demand pick-up,” the report said.
The agency also said that entities with a strong rural exposure are likely to fare better owing to a quicker recovery.
“Cement sales have declined around 40% yoy in the June quarter of FY21, with companies having higher rural and individual home builder exposure better placed. Central and eastern regions, with a higher component of rural demand and better labour availability, have been better placed as against the western region ,” the report said.
Industry cement demand after falling to around 85% yoy in April 2020, in May the decline reduced to 22% yoy for June, this was driven mostly by the rural segment. Ind-Ra report even said that the segment will continue to outperform urban demand over the next few months.
“Most large cement companies are likely to have operated at 80%-90% of last year’s level in June 2019, with a few companies even witnessing yoy growth. The recovery was driven by rural demand which was aided by a good rabi crop, adequate availability of local labour and lower spread of COVID-19,” the Ind-Ra’s report said.
The agency said that a sharp increase in realisations and decline in variable costs are likely to have cushioned the EBITDA/mt of cement companies in 1QFY21.
“Despite a 4% yoy contraction in volumes, the aggregate Ebitda/mt of listed cement companies hit a historical high of Rs 1,030/mt in FY20 as against Rs 809/mt in FY19 on the back of higher realisations, and cost management surpassing the previous high achieved in FY08,” the report said.
Most of the ongoing capex is witnessing delays of three to six months due to labour shortage. However, Ind-Ra expects around 65% of the announced capex for FY21 to come onstream, given that, much of it is in advanced stages.